Home values and firm behaviour

What is this research about and why did you do it?

The link between housing and economic activity is often seen as working through consumers responding to house prices either as a result of wealth effects or because of changes in the availability of credit. However, for entrepreneurs and small business owners, housing is also an important source of collateral for business loans. Around half of business loans in the UK are secured against the entrepreneur’s personal assets; typically, the family home. This is true for both start-ups and ongoing businesses. The implications of changes in house prices for this sort of borrowing and for firm-level outcomes required exploration.

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How did you answer this question?

In the UK, those in charge of a business (the directors) must register their usual residential address with Companies House.  We merge this data with information from the Land Registry on housing transactions to value directors’ properties, and with firm-level information on employment, balance sheets and income statements.  We explore the effect of a change in director housing wealth on firm behaviour using a suite of empirical approaches to control for other channels beyond those flowing from the value of the collateral.

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What did you find?

We find that for every £1 increase in the value of directors’ homes, the average firm invests 3p more in fixed assets like machinery or its own buildings. For every £1.1 million increase (2005 prices) in home values the firm hires one more worker. Firms that exhibit signs of being financially constrained as well those that have directors who are more highly leveraged respond more to home values.  

These effects are concentrated in the lower portion of the firm size distribution (see figure). By weight of numbers, the directors of smaller firms own a disproportionate share of director housing wealth. Hence, an increase in house prices can have large aggregate effects through increasing the collateral available to firms. For the economy as a whole, our estimates translate to a 1% increase in house prices directly increasing aggregate investment by 0.28%. By way of comparison, aggregate house prices increased by around 80% over our 2002-2014 sample period.

Fixed investment response by firms to changes in directors' house values across the firm size distribution. The figure plots the response of fixed investment in £’s to a £1 increase in the home values of the firm’s directors. The blue diamond is the point estimate, with 95% confidence intervals also presented. The y-axis shows the coefficients for different firms based on the initial size of their balance sheet (x-axis). The percentages at the top of the figure are the shares of total director housing owned by the directors of firms in a particular size category – e.g., the directors of firms  with less than £1m in assets own 83.6% of the housing wealth owned by the directors of all firms combined.

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What implications does this have for the research on wealth concentration or economic inequality?

The personal wealth of entrepreneurs is not equally distributed. Our research shows that the personal assets of entrepreneurs are an important determinant of whether a business, including on-going businesses, get the financing they need to grow. Increases in house prices can perpetuate wealth concentration and inequality by providing access to finance for investment for some firms and preventing relatively poor entrepreneurs without such collateral from seizing business opportunities.

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What are the next steps in your agenda?

In follow up work (Bahaj, Foulis, Pinter and Surico, 2022, Journal of Monetary Economics) we explore the implications of housing collateral for business loans for the transmission of monetary policy. In particular, we show that it can be used to be explain unequal firm-level responses to changes in interest rates. More work is also needed to understand the terms of the business loans secured against personal assets including whether lenders insist on the collateral to just obtain security or whether the collateral has an additional role as a screening/disciplining device.  

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Citation and related resources

This paper can be cited as: Bahaj, S., Foulis, A. and Pinter, G. 2020. 'Home values and firm behavior'. American Economic Review, 110(7), pp: 2225-70.

Related resources:

• A short summary video
• This article's figure features as an AEA featured chart (3rd August 2020)
• A blog on this article